China's Baosteel hit by weakening yuan

BEIJING--Already facing pressure from slumping demand, China's largest listed steelmaker has a new challenge: A weakened Chinese currency.

State-run Baoshan Iron & Steel Ltd. said Monday that foreign-exchange losses and weakness in China's economy led to a 15% decline in net profit growth in the first half of the year compared with a year earlier. The company, also known as Baosteel, and other steelmakers have been hit by slowing growth in the world's No. 2 economy, particularly in the slumping housing market, as well as by broad industry overcapacity.

Its bottom line was also hit by 270 million yuan ($43 million) in foreign-exchange losses due to the company's dollar-denominated debt holdings, General Manager Dai Zhihao said at an online investor conference. The losses were largely due to a 0.9% fall in the value of the yuan in the first six months this year relative to the U.S. dollar, as well as changes in U.S. interest rates, Mr. Dai said.

The pressure could last into coming months, Mr. Dai said. "We think that a weak yuan will persist through the third quarter or to the end of the year, but in the medium term, the yuan will maintain its stability relative to the dollar or rise a little," he said.

A weak yuan is generally good for Chinese factory owners because it makes Chinese exports cheaper in terms of other currencies. But it can also hurt energy companies as well as energy-dependent ones like airlines because oil globally is priced in dollars, making it more expensive to buy with a weaker yuan. It also hurts companies that have borrowed in dollars seeking lower interest rates and available cash.

Baoshan holds about 70% of its debt in U.S. dollars, out of a total debt portfolio valued at less than 55 billion yuan, or about $9 billion, Mr. Dai said. It began to accumulate such debt in recent years because interest rates were lower than what the company could find domestically, Mr. Dai said. Baoshan has taken measures to lock in forward-exchange arrangements for payments expiring by the end of the year, he said.

The steel industry is suffering from slowing economic growth in China as well as efforts by Beijing to rein in an explosion over the last five years in domestic credit. That in particular is impacting the property market, a major steel consumer and a part of the economy also suffering from overcapacity.

The Chinese steel industry is facing what Mr. Dai on Monday called "the weakest period for the industry since the 2008 global financial crisis." China's steelmakers are beset by oversupply, which has kept prices low even as mills have to keep pace with environmentally motivated government directives to cut production capacity.

Steel demand hasn't completely evaporated, Mr. Dai said, though its rate of increase is slowing. Steel demand rose just 0.4% in the first half, the state-backed China Iron and Steel Association said earlier this month. China's steel output is projected grow at 3% this year, the industry's slowest pace in five years.

Shanghai-based Baoshan said its net profit fell to 3.15 billion yuan in the January-to-June period compared with 3.7 billion yuan a year earlier. That marked an accelerated pace of decline from a 7% fall in the first quarter.

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